Essay: Formation of contract overview

In order for a contractual relationship to become established between parties, there needs to be an existing agreement. In traditional English contract law, the matching of offer and acceptance is required in order to form a contract however contemporary methods of forming a contract have distanced from the traditional requirements. The first step towards establishing a traditional contractual agreement requires an expression of disposition from an offeror. This offer is made as a proposal from the offeror in order to form a contract with the offeree if the proposal is accepted in order to display an agreement between both parties. In the traditional approach to forming a contract by using offer and acceptance, there are two types of contract models which are followed when forming a contract between two parties. These basic contract models are unliteral contracts and bilateral contracts; in an unliteral contract a general offer is made where anyone is able to accept whereas in a bilateral contract only one party is able to propose an offer to another. Carlill v Carbolic Smoke Ball co [1893] is a dominating example concerning unliteral contracts. In this case, the defendant placed an advertisement promising to pay £100 to any person who caught influenza after using its smoke ball remedy for a certain amount of time however refused to pay the claimant. The case was then held in the Court of Appeal where it was decided that Mrs. Carlill was entitled to the cash reward due to the fact the defendant stated that there was sufficient funds placed in a separate bank account in order to pay any claims which were made which demonstrated that there was intent.
The traditional requirements of an offer is also to ensure that the offer is clear easily identified by the offeree. Without a clearly indefinable offer, issues regarding the formation of a contract will most likely occur. This can be made evident through Gibson v Manchester City Council [1979] where the defendant Manchester City Council were in dispute with the claimant Gibson regarding the purchasing of a mortgage on a council owned property. Having received a letter from Manchester City Council which claimed to not amount to a firm offer, the claimant was unable to purchase the property due to the refusal of the defendant. This case was then taken to the House of Lords and the issue on appeal was whether the defendant’s letter could be interpreted as a clear offer or as an invitation to treat. The final decision concluded that there was no clear binding contract and therefore the defendant was not legally obliged to sell the property due to the letter lacking clear and specific detail regarding the price of the mortgage. This case is therefore key in demonstrating the importance of a clear offer when forming a traditional bilateral agreement between two parties.
On the other hand, contemporary methods of forming a contract can be made evident through Lord Denning and his rejection of traditional offer and acceptance. In his view, he stated that “it is a mistake to think that all contracts can be analysed into the form of offer and acceptance. He additionally made comments on the Gibson v Manchester City Council [1979] case, suggesting that he was not in favour of deciding which letter could be seen as an offer and which letter could be seen as acceptance. Denning also made similar comments on cases such as Machine Tool Co Ltd v Ex-Cell-O Corp [1979] when suggesting that “our traditional analysis of offer, counter-offer, rejection, acceptance…is out of date”. This shows a contrast in methods between the traditional and contemporary approaches to forming a contract between two parties. The re-establishing of Lord Denning’s approach can be seen in the form of RTS Flexible Systems Ltd v Molkerei Alois Miller Gmbh [2010] where it was decided that it was not essential for both parties to reach an agreement on all terms and conditions in order to enter the contract. This can therefore be made useful when showing that both contemporary and traditional approaches can be used in order to show the existence of a contractual agreement.
When forming a traditional contract, offers can also become confused with an invitation to treat and therefore it is important to clearly establish the differences between an offer and other activities which may appear as similar to offers. An invitation to treat is not an offer however is often used by the seller as a method of inviting someone else to make the offer. Examples of invitation to treat which may be mistaken for offers include advertisements, brochures and price lists. An example of invitation to treat in context would be Partidge v Crittenden [1968] which can be seen to contrast the case presented in Carlill v Smokeball Co [1893] due to the fact that the defendant had placed an advertisement which didn’t amount to an offer but was “merely an invitation to treat”.
Subsequently, following the establishment of a clear offer in order to form a contractual agreement acceptance must be fully complete. If acceptance from the other party is not made in full, the offer may amount to a counter-offer which would then replace the original offer. Acceptance is required to be a ‘mirror image’ of the original offer and this can be seen in Hyde v Wrench (1840). In this case, the claimant replaced the original offer with a counter-offer and therefore refused to purchase land. The claimant then attempted to accept the initial offer at the original price however it was decided that there was no existing contract formed. This was because when the counter-offer was made it also destroyed the original offer meaning it can no longer be accepted. Once a clear offer has been established, acceptance must be fully communicated. If the acceptance is not communicated between the parties then silence means that the contractual agreement cannot be formed.
Another traditional requirement is that in order for acceptance to be communicated, it is essential that the offeree has knowledge of the offer. If the offeree is not aware of the existence of the offer then acceptance is not able to be made in full and as a result cases similar to Inland Revenue v Fry (2001) may occur. Fry owed Inland Revenue over £100,000 in unpaid taxes and therefore sent a cheque to the Inland Revenue. Fry also stated that if this check was banked, it would be acceptance of her offer and of her cheque which did not cover the full owed amount. Following being held in The High Court, it was decided that the banking of the cheque by the Inland Revenue did not amount to acceptance of an offer and therefore there was no existing contractual agreement. The High Court claimed that the reason acceptance was not valid was due to the fact the Inland Revenue banked the cheque from Fry without the knowledge of an offer being made. This therefore highlights the importance that the offeree has clear knowledge of the offer before acceptance can be seen as valid.
However where modern communications are concerned, the postal rule is argued to be outdated and used as a traditional approach as well as an exception to the communication rule. Although the courts have begun to move away from this traditional approach, it has yet to be abolished by The House of Lords despite it being a large subject of criticism. This criticism is often formed around the argument that the traditional approach causes unfairness to the offerors and therefore could result in the offerors being obliviously locked into a contractual agreement without knowledge of the existing acceptance. This outdated method is also seen to be problematic because of the fact the offeror could potentially be locked into an existing contract even when the acceptance letter is delayed or possibly lost in the post.
On the other hand, more modern communications such as email and fax may also be used. However, as seen in Bircham & Co Nominees (No.2) Ltd v Worrell Holdings Ltd [2001] it is emphasised that fax was not acceptable, and acceptance must be made through a correct and suitable method. Other issues surrounding methods of communication when creating a contractual agreement through offer and acceptance can also be made explicit through Mondial Shipping and Chartering v Astarte Shipping [1955]. The issues concerned with the more traditional method telex are raised. The use of telex meant that acceptance was not received until the next working day which resulted in being the following Monday and therefore the court concluded that acceptance was not fully communicated. The contemporary method of using email is also viewed as being complicated and it is often brought to questioning whether the postal rule or fax receipt rule should be applied when using email to accept an offer. The fax rule is often favoured. Acceptance by signature can also be seen as a valid method of acceptance when misrepresentation is absent and therefore allows a contractual agreement to be formed.
The contemporary approach to acceptance in order to form a contractual agreement however remains the approach which is mainly favoured by judged and used in cases such as Gibson v Manchester City Council [1979] in the Court of Appeal however the House of Lords rejected this approach and instead favoured the traditional approach. Offer and acceptance by conduct can also be seen in cases such as Brogden v Metropolitan Railways [1877]. In this case, it was decided that the written contract was valid despite the fact that there was no communication between parties regarding the acceptance. The defendant only filed the document without confirming acceptance to the contract and throughout this period the claimants still continued to supply coal. It was not until a dispute between both parties had been raised when it was questioned whether the acceptance was valid.